Question
December 21, 2005
VIAFACSIMILE NO. (202) 326-2624
Mr. Michael B. Verne
Federal Trade Commission
Pre-Merger Notification Office
Bureau of Competition, Room 303
600 Pennsylvania Ave., NW
Washington, DC 20580
Re: Size-of-Person Test Analysis
Dear Mike:
Thiswill follow up our telephone conversations yesterday and last week. I describedto you the following set of hypothetical facts:
Mr.Z is the owner of 100% of three LLCs ("A", "B" and"C"). He has no regularly prepared balance sheets. If he prepared onetoday for purposes of the transaction, his investment assts would consistprincipally of the assets of the entities he controls. Mr. Z funds the entitieshimself, rather than borrowing money or raising capital from outsiders.
LLCA has assets on its last regularly prepared balance sheet of $ 8 million, ofwhich $ 2 million represents an account receivable from LLC B. The accountreceivable represents (a) loans from LLC A to LLC B, and (b) cost allocationsof various expense items that are common to the three entities, which alloperate out of the same premises and which share employees and certain assets.
LLCC has assets on its last regularly prepared balance sheet of $1 million,$500,000 of which represents an account receivable from LLC B, which is similarin nature to the account receivable described above.
LLCB has assets on its last regularly prepared balance sheet of $2 million. Thebalance sheet includes assets that LLC B purchased with funds from LLC A andLLC C. However, it would be difficult if not impossible to trace the exactdollars loaned by LLC A or LLC C to specific assets on LLC B's balance sheet.
Mr.Z proposes to sell his interests in LLC B to an outside party. The aggregatebook value of Mr. A's three controlled entities is $11 million, which exceedsthe $10.7 million threshold. In preparing a balance sheet for purposes of thetransaction, may Mr. Z under Rule 801.11 (b) eliminate the LLC B receivablesfrom the balance sheets of LLC A and LLC C, which would reduce the aggregatevalue of Mr. A's assets to less than $10.7 million?
Weconcluded that Mr. Z could disregard the accounts receivable on LLC A's and LLCB's balance sheets for two reasons, First, accounts receivable typicallyrepresent money due the reporting person from third parties. Here, by contrast,Mr. Z essentially owes himself the money.
Second,to the extent the loaned funds were used by LLC B to purchase assets, LLC B'sassets and LLC A's and LLC C's accounts receivable would be duplicative.
Wealso addressed a second issue, relating to CDs held by Mr. Z. Between now andthe date of closing, Mr. Z. intends to sell the CDs and use the cash to pay offcertain debts of his LLCs. We agreed that, for purposes of the size of persontest, the liquidation of the CDs prior to closing was analogous to the paymentof an extraordinary dividend and could permissibly reduce Mr. Z's level ofassets in a way that resulted in his failing the size of person test.
Theanalogous scenario, involving the payment of an extraordinary dividend, wasaddressed in Opinion Number 195 of the Premerger Notification Practice Manual(2003 edition). There the staff concluded that cash that would be distributedto shareholders as an extraordinary dividend before closing may be disregardedfor purposes of the size-of-person test, even where the dividend is beingcreated to fall below the size-of-person test. We agreed that the same analysiswould apply to Mr. Z' s sale of the CDs.
Pleaseget back to me if I've misunderstood the analysis or you have any furtherquestions.